Directors Responsibilities

For Companies in financial difficulty

This section of the website is to raise general awareness to Directors of their responsibilities and potential liabilities in circumstances where a company is experiencing financial difficulty. Please click on the Directors Responibilities factsheet for more detailed infomration on this topic.

It should be remembered that each situation will be unique and this section cannot and should not replace the taking of formal professional advice, such as the instigation of our free business review, which will allow us to consider each set of circumstances on its own merit.

A liquidator, administrator or administrative receiver is required to investigate and report on the conduct of all persons who were directors or shadow directors of the insolvent company during the 3 years prior to the date of insolvency.

The report may include some, all or none of the areas of misconduct detailed above. The investigation will also include, but not be limited to, director’s remuneration, compliance with company legislation including keeping proper accounts and cooperation with the insolvency practitioner in pursuit of his duties.

The report is submitted to the Disqualification Unit of the Insolvency Service, an agency of the Department of Trade and Industry where the decision whether to pursue an action for disqualification is made.

A successful action by the DTI will result in a person being disqualified from acting as a company director or being involved in the formation, promotion or management of a company for such period as the court decides.

This applies where a director or shadow director of a company that has gone into insolvent liquidation, operates without leave of court as director or shadow director of a new company with a similar name to that of the insolvent company, in the 5 year period following the date of insolvency.

To be guilty of breach of Section 216 a person must have been a director or shadow director within a period of 12 months prior to the date of insolvency.

The penalties if found guilty include imprisonment, a fine or both, together with personal liability for the debts of the new company. In addition any person who knowingly acted under instruction from the guilty party can incur personal liability to contribute to the debts of the new company.

This Section defines actions that are similar to those dealt with in Section 238 Transactions at Undervalue but removes the time limits.

The penalties for successful prosecution by a liquidator, administrator, or supervisor of a voluntary arrangement are broadly in line with those for breach of Section 238.

When an officer, liquidator, administrator, administrative receiver, manager or promoter of a company breaches their fiduciary duty, by misapplying, retaining or becoming accountable for any money or property of the company.

A liquidator or Official Receiver may bring an action for misfeasance against all or any of the above parties, who if found guilty may be required to repay, restore or account with interest in respect of the money or property misappropriated, or contribute by way of compensation such amount as the court sees fit.

You conduct a transaction with any party n which the company receives significantly less, either in money or moneys worth than the value of that which it has released to the other party.

The relevant time period for a transaction at undervalue is the same as for a preference transaction, that is a liquidator or administrator can bring an action in respect of transactions that occurred with 2 year period prior to the date of insolvency in the case of associated parties and 6 months in the case of non associated parties.

The penalties are the same as for preference transactions.

A preference transaction is any transaction entered into between a company and a third party which has the effect of placing the third party into a better position than he/she/it would otherwise have been (had the transaction not taken place) in the event of the company going into liquidation. One of the most common type of preferential transaction is discharging a debt to a favoured creditor shortly before the company goes into liquidation. The creditor is preferred because he/she/it receives payment of the debt in full whilst other creditors may only receive payment of a percentage of their debt (if anything) from the company in liquidation.

An Administrator or Liquidator may only seek orders setting aside the preferential transaction (or other order under the section) if it was entered into 6 months prior to the “onset of insolvency” which will usually be the date upon which a formal insolvency procedure was commenced.

If however the transaction is between the company and a person “connected” with the company then this time limit is extended to 2 years.

A person (which includes a company) is “connected” with an insolvent company for the purposes of this section if he or she is:-

1) A director or shadow director of that company;
2) An associate of such a director or shadow director;
3) An associate of that company.

An individual person is “associated” with another individual if he/she is the spouse of that individual or a relative (siblings, uncles, aunts, nephews, nieces or children step children or adopted children) of that individual or in partnership with that individual.

A company is “associated” with another company if the same person has control of both companies. Broadly speaking a person (which includes another company) has “control” of a company if the directors are accustomed to acting on his/her directions or if he/she/it owns more than a third of the voting shares in that company. There are also further rules governing groups of individuals who have linked shareholdings in companies.

If an individual or company is “connected” with the company making the preference then the burden of proof also shifts against the connected party in relation to the other requirements under the section which need to be established for the transaction to be successfully challenged.

You continue to trade with the intention of defrauding your creditors.

If found guilty penalties are the same as those incurred in wrongful trading. In addition however being found guilty of fraudulent trading may result in a limitless fine and / or imprisonment for up to 7 years.

You continue to trade when you knew or ought to have known that your company was insolvent and had little chance of recovery.

If found guilty a director will be required by the court to contribute to the assets of the company as compensation to those creditors who have suffered due to the wrongful trading.

The level of contribution is generally assessed on the extent to which the company’s financial position deteriorated since it was known or should have been known that it was insolvent with no reasonable prospects of avoiding insolvent liquidation.

A successful prosecution may also lead to action under the Company Directors Disqualification Act 1986, seeking to prohibit you from acting as a company director for a period of between 1 and 15 years.

Defence against such an action would take the form of proving that every step was taken to avoid worsening the position of the creditors or indeed mitigating their loss.

If you think your company could be heading towards insolvency, don’t delay in seeking professional advice as to whether you should continue to trade. Our free business review will highlight the issues facing you and your company and provide complete details of all options available to you. We can help deal with the problems directors face.

Hold regular meetings and continually assess the company’s situation keeping detailed records and formal minutes of everything you discuss, and the reasons for your decisions.

Make sure you use accurate and up-to-date accounting information to establish the financial condition of the company.

If your company is insolvent, take steps to minimise the loss to your creditors and don’t delay in seeking professional advice.

In an insolvent liquidation a Liquidator may bring the following actions against you

If you allow a company to trade when it’s insolvent and there’s no prospect that its financial condition will improve, you can be prosecuted, which can result in you becoming personally liable to contribute to the assets of the company. Additionally when the company goes into liquidation, the liquidator will consider your actions when submitting his report to the DTI. This may result in you being prohibited from being a company director for a period of between 1 and 15 years.

Don’t continue to trade when the company is insolvent, unless you are certain that there is a strong prospect that the company will avoid insolvent liquidation.

Don’t incur further credit or issue cheques when you know there is little or no prospect of payment.

Don’t take customer deposits when you know the company can’t fulfil the order.

Don’t attempt to pay certain creditors in preference to others.

Do take early advice and our free business review.

Do make sure you receive the true market value of any company assets you sell.

Do keep proper accounting records.

Do pay Crown taxes on time.

Do submit returns and accounts to Companies House on time.

Do submit tax returns on time.

When it’s unable to pay its creditors on time, and/or when the value of its assets does not cover its liabilities.

All company directors have a legal responsibility to ensure that they understand the company’s finances and that they handle them correctly.

The Insolvency Act 1986 defines the date of insolvency as the date on which a Liquidator, Provisional Liquidator, Administrator, Administrative Receiver or Supervisor of a Voluntary Arrangement was appointed either by the creditors, the Court or a debenture holder.

If a Liquidation, or Voluntary Arrangement follows immediately after the release of an Administration Order the date of insolvency is the date of the granting of the original administration order.

The Companies Act 1985 defines a director as “any person occupying the position of director by whatever name called”. A more practical definition is any person who has control over or who holds responsibility for the direction of a companies business.

A Shadow Director is defined in the Companies Act as “a person in accordance with whose directions or instruction the directors of the company are accustomed to act”.

It should be noted that the reporting requirements of the Insolvency Act 1986 require a duly appointed Liquidator, Administrator or Administrative Receiver to report on the conduct of those persons who were directors, or shadow directors of the insolvent company during the 3 years prior to the date of insolvency.